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How is Income Tax Calculated in
Canada?

Canadian federal income tax is calculated
separately from provincial/territorial income tax. However, both
are calculated on the same tax return, except for Quebec.

Federally, there are 5 tax brackets in 2018, since 2016. Each province
has multiple tax brackets. The federal and provincial/territorial income tax rates are combined in
our
tax rate
tables so that taxpayers can see the total tax rate being
paid, including any provincial surtaxes where applicable.

First, taxable income is
calculated. Taxable income is the same for the federal and
provincial/territorial calculations, except for Quebec, for which the taxable
income may differ from the federal amount. Then, federal
and provincial/territorial income taxes are separately calculated based on taxable income.
To see the detailed calculation, look at Schedule 1 of the federal tax return,
or form 428 of the provincial/territorial tax return. These schedules
can be found on the Canada Revenue Agency (CRA) website in the tax
return forms. For Quebec, see the income tax return and work chart
401 on the Quebec website in the income
tax forms. See the following example of the federal Schedule 1
initial tax
calculation for a taxpayer with taxable income of $150,000 for 2016.

The tax rates increase as taxable income increases.
Everyone pays the lowest tax rate for the amount of their taxable income
within the lowest tax bracket. Taxable income in excess of this is taxed
at the next higher rate.

After income tax amounts are calculated, non-refundable tax credits are
deducted from the tax payable. Again, this is still a separate
calculation for federal and provincial taxes. Non-refundable tax credits include the
basic personal amount, which is available to every taxpayer. The tax
credits are calculated in a particular order, as defined in the
federal Income Tax Act and the provincial/territorial Income Tax Acts. A list of
most of the non-refundable tax credits can be seen in the
tables on the personal
tax credits page. The actual tax amount of the credits is
calculated by multiplying by the tax rate for the lowest tax
bracket. Quebec, until 2016, used 20% instead of the lowest tax rate of 16%.
The lowest 16% rate is used for Quebec starting in 2017, except for
the tax credits for student loan interest and medical expenses, which
still use the 20% rate.

Donations have a 2 part tax credit calculation, and dividend tax
credits are calculated separately. The tax credit amounts are
then deducted from the previously calculated income tax.

PEI provincial surtax is calculated based on net
taxes payable after all refundable tax credits have been
deducted. Ontario surtax is calculated based on net taxes
payable after all refundable tax credits except for dividend tax
credits have been deducted. Once federal and
provincial/territorial income taxes including surtaxes and net of
non-refundable tax credits are calculated (zero if negative), the
refundable tax credits are then deducted. If they exceed the net
taxes payable, they will be refunded to the taxpayer.

The basic personal amount for each province and territory is listed
in their tax rate table, as well as the tax rate that is applied to calculate
the tax credit. The basic personal amount is the amount that can be earned before any
provincial/territorial tax is paid. Some provinces
also have a low-income tax reduction which increases the
amount that can be earned before any tax is paid.

The provincial/territorial tax rates before being combined with
the federal rates are shown above the table of combined rates for each
province/territory. CRA also has an article Canadian
Income Tax Rates for Individuals - Current and Previous Years. The
CRA tables do not include any provincial/territorial
surtaxes. The surtaxes are included in our combined
tax rate tables.

Revised: January 20, 2019The browser does not support JavaScript. Please access the web page using another browser.